HealthSouth Accused of $1.4 Bil. Fraud

Thursday

Mar 20, 2003 at 2:44 AM

By JAY REEVESThe Associated Press

BIRMINGHAM, Ala. -- HealthSouth Corp. and Chairman Richard Scrushy were accused Wednesday of a massive accounting fraud that the government said inflated profits by at least $1.4 billion to mislead investors that the health care giant was keeping pace with Wall Street's expectations.

Acting on Scrushy's orders to "fix" earnings, senior accountants gathered in what they called "family meetings" to falsify results when HealthSouth's performance failed to meet Wall Street forecasts, according to a complaint by the Securities and Exchange Commission.

With the complaint, trading in the company was halted for two days, and the Justice Department announced the company's former chief financial officer had pleaded guilty to securities fraud charges and was cooperating in a continuing investigation.

HealthSouth was rocked last August when it announced that a Medicare billing change would hurt its earnings significantly. That sent its stock price plummeting and led to lawsuits claiming in part that Scrushy knew of the Medicare change's impact when he sold half his stake in the company a few weeks before the public announcement.

The government charged that HealthSouth's August warning about the Medicare change really was a Scrushy-approved "scheme" to lower analysts' expectations.

The company reported income before taxes of $1.6 billion from 1999 through June 30, 2002, but it really made only $169 million, according to the SEC complaint.

HealthSouth bond prices fell sharply with the announcement, an analyst said, indicating the company could be in danger of default because of difficulty raising capital.

"We would like to see the board of directors step up and disassociate the company from Mr. Scrushy," said Premila Peters, a vice president at KDP Investment Advisors, a credit analysis firm in Montpelier, Vt.

HealthSouth is the nation's largest provider of outpatient surgery, diagnostic imaging and rehabilitation services, with 1,700 centers in all 50 states and abroad. It announced layoffs of about 1,000 of its 50,000 employees last year.

The SEC made the accusations in a civil suit filed in federal court in Birmingham, where HealthSouth's headquarters is located on a sprawling campus.

The government asked the court to make HealthSouth and Scrushy repay any "ill-gotten gains" and to pay unspecified civil penalties. It also sought an order barring Scrushy from acting as a director of any publicly held company and freezing his assets.

HealthSouth spokeswoman Kristi Gilmore said the company had no immediate comment.

HealthSouth, founded by Scrushy and a few friends in 1984, has denied wrongdoing in the past. It said it was cooperating with the investigation.

The 19-page SEC complaint said HealthSouth had issued fake earnings at Scrushy's instruction since it went public in 1986.

The company's assets were overstated by at least $800 million -- or about 10 percent -- by the third quarter of last year, the SEC said.

The Justice Department said the company's former chief financial officer, Weston Smith, has agreed to plead guilty to securities fraud, conspiracy and wire fraud charges, as well as false certification of financial records that were designed to inflate the company's revenues and earnings by hundreds of millions of dollars.

Smith, 42, of suburban Hoover, has agreed to cooperate with the federal government's investigation, the Justice Department statement said.

The charges came a day after FBI agents served search warrants and interviewed workers at HealthSouth headquarters, and were given access to financial records and other materials.

HealthSouth stock finished at $3.91 a share Tuesday on the New York Stock Exchange, down from a high of about $30 five years ago.

The company confirmed in September that the SEC was investigating the timing of its announcement on Aug. 27 that reduced Medicare payments would slash the company's pretax profits by $175 million a year.

Scrushy had sold half his stake in the firm -- some $25 million worth of stock -- a few weeks before the announcement.

Citing in part the Medicare change, HealthSouth reported a loss of $406 million in the fourth quarter.

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